Digital Transformation in a Family Business

Written By: Kristy Barber
Date: July 20, 2022

The digital transformation space provides a lot of opportunities for technical advancements, improvements, and overall transformations to your small business. This is also applicable to small family-run businesses, where most entrepreneurs will see their business needs outgrow the capabilities of their basic accounting software at some point. When that happens, it can be a stressful time. How do you choose the tools that will help your business grow? In comes a new transformation.

We talked with our Small Businesses Specialist to help break down things you should consider about the inner workings of a family business before jumping into the transformation wagon.

What a family business looks like

Family businesses come in all kinds of shapes and sizes. Some are small, with under 10 family members.  Others are larger and may employ 20 or 30 family members. And it’s not the norm, but there are even larger family businesses, like a client of ours that has around 50 employees and almost 99% of them are family members. The industries they’re in vary but, for example, studies[1] show that large family-owned businesses dominate retail clothing, engineering, automotive, and construction.

Dynamics from an alignment perspective

Executive alignment is a key strategy to any successful digital transformation. From a family business perspective, it looks different than for the average corporation because there are different levels of ownership. There are many cases where the past generation still holds the keys to the kingdom while a new one is coming in with grand ideas regarding technology.

Alignment gets difficult when the newer generation wants to, for example, put some more robust software in place to take the business from point A to point B, but the generation that has been running the business for 35 years feels they are the only ones that really know what the best solution for them may be.  

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Organizational design best practices

Having an effective organizational hierarchy or just overall roles or responsibilities is a must. Before building any structure, you must make sure your family members are ready to be a part of the family business because it's going to look very different than their corporate 9 to 5.

You must treat each member fairly and without special treatments – like that cousin starting at $300,000 a year just because they have the family’s last name. Work up the ranks, address underperforming family members, and know how you’re going to mitigate risks, just like everybody else.

Family businesses tend to be a highly vulnerable environment, and different dynamics come with that, so you must plan for it. You may outsource a professional to help you have the more sensitive conversations or an advisor that can help with organizational change. Many also hire industrial psychologists to come in and help mitigate some of the problems that will most likely arise from an outsider’s perspective, creating more harmony within the organization.

Also, keep in mind that the generations that have built and maintained the business for 30 or 40 years may not be interested in leaving an inheritance to the next generation. Perhaps they want to instill in younger generations the values that come with building something for themselves or may even want to sell at a particular point in the business life and have decided not to give the next generation the opportunity to buy it, so future plans are an important element of the overall design planning process.

Tribal knowledge and change

How do you integrate a new technology knowing that you also need to capture tribal knowledge to understand the true needs of the business? Well, it's tricky. Legacy employees will most likely worry about how much you’re going to modify things because they’re comfortable with what they’ve been doing so far. You know the saying: if it’s working, why change it. So, if you’re implementing new technology or changing business processes, you must make sure that they see the value in what you're bringing and help create a level of comfortability for them.

Dr. Christina Serrano, a professor at CSU, once shared with us at Third Stage that change needs to come with a motivation for the individual. There must be an understanding and a motivation to want to grow the business, create more efficiencies, or whatever the goal is to be able to capture that tribal knowledge, especially if there’s a lot of emotion and pride around it.

We must be aware also of the fact that before this fairly recent tech revolution, changes didn't happen as frequently. Now change happens so often that it feels like they’re daily, and people can have trouble adapting to it.

Integrating new technologies during a forced transformation

Covid-19 changed the way we do business. If you had a brick-and-mortar store, you went eCommerce and had to figure out how to integrate a Shopify account with your software. Certain industries grew and couldn’t keep up, so they had to hire more people – in this case, outsiders because maybe they didn’t have enough family members willing to get involved in the family business.

That brought an issue of adaptation to change and culture. Many were asking themselves, who's going to fit this culture we’ve built up within our company for so long? who's going to help us get to where we need to be? do we have the money to buy the software? do we have the time to implement it? It often requires expert help to navigate those waters.

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Software for family businesses

This heavily depends on the industry you are in. Maybe you're good at distribution or manufacturing, and there are softwares that are stronger at that. Even if we're talking about big ERP solutions like NetSuite, Infor, IFS, or QAD, for example, they have different strengths, so before falling for the big names, understand your business’s unique needs.

Piece of advice for family-owned businesses trying to grow

It’s important that you make sure to have a strategy and understand what growth is going to look like for your business. Small businesses and family businesses can get easily hung up on what they have always done and what has been successful for them in the past. Don’t be afraid to bring in a non-family member to the board of directors or hire an outsider that has a different lens to see what needs to be done if the members running the company don’t have that specific skill set.

Also, make sure to have an exit strategy whether you’re selling at some point, handing the business down, merging, or whatever strategy, because that helps you scale. Recognize you may not be able to keep your company forever and that the next generation may not want to take over, so you must plan accordingly.

Technology plays a vital role in today's businesses, big and small. For family-owned businesses, it can be especially important to have the right technology in place to help them run smoothly and efficiently. However, it is important to consider the inner workings of a family-owned business before making any decisions. Things such as the elements mentioned above, as well as communication style, decision-making process, and budget may all need to be considered before moving forward with any sort of transformation.

With careful planning and execution, a family-owned business can make the transition to new technology and continue to thrive for years to come. If you'd like to learn more about our small business capabilities here at Third Stage Consulting, please feel free to reach out to us, and our specialists will guide you.


[1] Source: PwC, The World's Top 750 Family Businesses Ranking, Family Capital, 2020

Author:
Kristy Barber
With strong background in finance and over 18 years of accounting experience, over 18 years of accounting experience, Kristy is able to both define the feasibility and impact of business process changes to and impact of business process changes to the bottom line as well as justify a technology initiative through business case justification.
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